Economic Affairs Department of the Finance Ministry of India

Economic Affairs Department is a large department and covers a wide area of varied activities.

It consists of seven main divisions, namely:

(1) Economic,

(2) Banking,

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(3) Insurance,

(4) Budget,

(5) Investments,

(6) External economic management, including commercial banks,

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(7) Term leading institutions, investment regulations, external assistance, and production of currency/bank notes and coins of various denominations, postal stationery and postal stamps.

It also analyses economic trends and advises the government on matters regarding financial management. Policy changes to accelerate growth control over inflation banking procedures of public sector banks, and other economic institutions need its guidance. It formulates policies of the insurance companies and prescribes terms and conditions of service, monitoring performance.

Department tenders economic advice to the government on important economic policy matters and handles public grievances. It analyses the prevailing economic trends, and appraises economic policies for improved economic performance.

Public policy issues in the fields of public finance, money and credit, prices and wages, foreign trade, balance of payments, external assistance and international finance are studied by the department. It works in close cooperation with the Reserve Bank of India, the Planning Commission, the Central Statistical Organisation, the ministry of commerce and the economic and statistical wings of other ministries.

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The budget division of the department prepares the budget of the Union Governments as well as of those states which are under President’s rule, and their budgets are presented to the Parliament. It recognizes stock exchanges and ensures that the transactions in them take place in accordance with rules and laws. Development of capital market and the protection of the investors’ interest with faith in the system are its responsibility. The department deals with the aid received by the country from international institutions and the aid given by India to other countries.

The Reserve Bank had liberalized the terms and conditions for housing loans and the National Housing Banks are actively engaged in the development of housing finance in the country. The department deals with cognate matters like internal finance, currency, coins, printing of currency, gold and silver refinery, import and export of gold and silver, fixation of interest rates for the Central government’s borrowings and lending’s, and accounting and audit procedures. It controls foreign exchange, budgeting, foreign and non-resident Indian investment and foreign exchange resources.

Several international institutions such as the International Bank, the European Economic Community, the Commonwealth Fund for Technical Cooperation, the India Consortium and agencies of the UN maintain a close contact through it. The aid given by India to the members of the Colombo Plan, to African countries and investment pattern for Employees’ Provident Fund are also handled by the department.

Legally speaking, 47 functions of the DEA can be classified into 18 heads as under:

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(1) Monetary control

(2) Foreign exchange and budget

(3) Control of source of foreign exchange

(4) Foreign capital investment

(5) Import export of gold ornament

(6) Foreign aid under technical programmes

(7) Administration for foreign aid by India to other countries

(8) Matters relating to plan committees, funds and missions

(9) Banking and money matters

(10) Advise to UN

(11) Budget, loans, savings, accounting and finance

(12) Planning, taxation, state finance, goods and development

(13) Sales Tax Act.

(14) Insurance, LIC

(15) Corporation Acts

(16) Stock exchanges and securities

(17) Joint stock companies

(18) Miscellaneous

Organisation of DEA:

The department of economic affairs has 8 departments, 8 subordinate offices, 1 attached office, 1 public undertaking and 2 advisory bodies. The eight divisions of the department of economic affairs as diagrammed above point out the nature and scope of economic administration which have a direct bearing on revenue and expen­diture of the government. As the names of the divisions are self-explanatory, it appears that this department is engaged in the development of infrastructure to help the banking and insurance industries which have wider repercussions for external finance and investment.

A number of Acts exist in these areas and their implementation is the responsibility of different divisions. For instance, if investment division looks after activities like foreign investment, share markets, capital control, NRI investments and India Investment Centre, the budget division administers the Contingency Fund of India, recommendations of the Finance Commissions on implementation of the recommendations of C&AG and review of interest rates on loans, etc.

The printing of stamp papers, currency notes, postal stationery by the Indian Security Press are onerous responsibilities and have to be managed by an independent division. Banking and insurance administration are closely linked with foreign trade, debt servicing and foreign exchange management which are under the specific administrative divisions.

The secretariat of this large department of the finance ministry has:

(1) Secretary and additional secretary: 2

(2) Economic advisers: 2

(3) Joint secretaries: 6

(4) Deputy secretaries: 10

(5) Under secretaries: 20

(6) Research officers (S&J): 7

(7) Section officers: 52

During last decade, the size, scope and nature of work of the DEA has undergone a metamor­phosis but its only attached office, i.e.. National Saving Organisation at Nagpur has not changed much. The post office bank and other private banks are increasingly making it a superfluous organisation.

The subordinate offices for:

(1) Mints

(2) Security Press

(3) Silver Refinery

(4) Security Paper Mill

(5) Rehabilitation Finance Unit, and

(6) Kolar Gold Mining are quite old but their output capacity has been enlarged because of the new demands of economy. For instance, the Hoshangabad Paper Mill produces 2,000 tons of currency paper as compared to the earlier target of 86 tons before independence.

The Kolar goldfield in a joint undertaking with Karnataka government is entrusted with additional responsibility of geological survey of the area. The Indians mints located in these cities since 1925 are working to their full capacity and have a separate wing to detect counterfeit coinage and currency. These subordinate offices perform their respective and specialized tasks but the department of economic affairs oversees them.

The five public undertakings of the economic department were born at different times. The Reserve Bank of India Act was passed in 1935 but it became a nationalized bank in 1948. It is a Bank of Bankers and its major function is to maintain economic stability in the country. It controls the exchange rates and makes periodic surveys by collecting data about the economy in its international context. The bank has a Governor and it formulates banking policies and coordinates and controls other banks through a central board of directors nominated by the government.

The State Bank of India Act 1955 created the SBI to assist banks in urban and rural towns. It promotes industrial loans and small scale industries through its scheme. The Industrial Finance Corporation was created in 1948 and the object was to provide loans and financial assistance to small companies. It is a corporate undertaking and can extend support to industrial units in backward areas. The three branches operating from Mumbai, Kolkata and Chennai offer loans and assistance to cooperative societies, hotels, and companies engaged in productive activity.

The Agricultural Refinance Corporation was created in 1963 and it refinances land mortgage banks. It works with the Reserve Bank of India with a purpose to give boost to rural banking. The UTI Act 1963 was enacted to sell units and promote private investment in development projects. The LIC and the SBI gave the seed money but because of recurring crises it lost its image. Now, it has been reorganized for the better security of the unit holder’s money. The advisory bodies on national savings and women’s savings are functional in varied ways and have mopped up public savings through certification.

Frailties and Reforms:

The ministry of finance has been subjected to severe criticism by Dean Paul Appleby and also by Administrative Reforms Commission for its tight and negative control over the purse of the government. It has been condemned for its ‘Pennywise and Pound Foolish’ approach in financial matters. Some of its structures are getting century old and very little fresh air is permitted by its die hard bureaucrats pursuing negative centralization.

Understandably, financial matters anywhere need special care, but if this ministry does not take the right advise and right path for functional actions, all operations in government slow down to stand still. A deeper look at its administrative organisation reveals that;

(1) Three departments of revenue, expenditure and economic affairs are scientifically organised but inside each department there are obsolescent wings, units and even divisions which need to be pruned and cut to size. The mushroom growth of non-secretariat units in the secretariat organisation is malignant and periodical weeding out is needed in every division and office.

(2) Some of the departmental divisions have became redundant or incongruent with the reorganized administrative system. For instance, insurance and banking, after 1997, need a fresher look in the era of liberalisation. The structures were needed to begin with but the vested interests in bureaucracy do not allow the structures to be dropped. Consequently, overlap and duplication of functions have resulted in non-functioning or obstructive opera­tions of banking and insurance divisions of the ministry.

(3) Linking of planning with financial administration also needs a new look; partly because Planning Commission and public enterprises are passing through a new area of liberalisation and privatisation and partly because the coordination regulatory activity of the Finance Ministry requires new kind of flat and advisory structure for its acceptability.

(4) The ministry notwithstanding its openness to reform or change remains a ministry to manage national finances and the budget. The globalisation policies have started making a dent. The NRI finance and investment is a mere beginning and imports are to be discouraged and exports need to be promoted for which separate and independent divisions are called for with appro­priate infrastructure conducive for development.

(5) The budget function on which the finance ministry concentrates all the year round has to be performed with the aid of cybernetics. Computers have come to stay and a heavy investment in Management of Information System (MIS) is Called for. The ministry has taken the change in an ad hoc manner. It has to modernise its budget division not only in terms of software, but in a big way to prepare a variety of budgets with latest techniques of PPBS and ZBB. The personnel of the ministry should constantly be trained and the units readjusted with the new organs of the ministry.

It is true that finance ministry represents a valuable legacy of the colonial period and has shown resilience in responding to the change since 1991. But the fact remains that its manpower dreads reforms or accepts them with a pinch of salt. Innovations are not welcome because they negatively reduce the authority and generate a fear of debureaucratisation, free economy is a miracle and the shift invites risks and hazards. Matters like portfolio investment, global depository receipts and direct foreign investment are too sensitive to be acceptable to rule oriented bureaucrats.

Naturally, the climate of scepticism renders the scenario exciting as well as frustrating. The challenge of change can be met by flexibility for which the ministry of finance should have its own independent permanent reforms cell more powerful than an O&M. It should prepare a blue print of organisational reforms of the ministry for five years and get it processed every quarter under instructions from finance minister and the prime minister of the country.